Legal Watch:Professional IndemnityAugust 2014 – Issue 002

In This Issue:

• Accountants not under a roving duty

• Negligent solicitor succeeds in reducing damages

• Surveyor not under a duty to predict subsidence

• SAAMCo revisited

Accountants not under a roving duty

01

The recent judgment in Mehjoo v Harben Barker (A Firm) was

gratefully received by all accounting firms and most other

professional advisers too.

The Court of Appeal upheld an appeal from a firm of chartered

accountants, Harben Barker Limited (HB), against a decision of

the High Court that it was negligent in giving taxation advice to

its client, Mr Hossein Mehjoo (M) and liable for approximately

£1m. The loss comprised of M’s capital gains tax (CGT), the

additional fees he incurred attempting to minimise his tax

liability and interest.

The court had to consider whether the accountants were liable

in negligence for failing to refer the non-domiciled client, M,

to a tax planning specialist to save CGT on the sale of his

business. To answer the question, the court looked at the

firm’s limited obligations to advise on tax planning as set out in

the retainer, any implied duty of care based on past business

relations and the standard expected of reasonably competent

accountants. The Court of Appeal ruled that HB did not fail

in its duty of care, as the duty did not extend to giving the

specialist tax planning advice that M alleged was required in

the circumstances.

Background M was born in Iran in 1959 and was resident in the UK since

1971. He subsequently claimed asylum and became a British

citizen. He built up an extremely successful retail fashion

business and in 2003 his company merged with another to

form a UK registered company, Bank Fashion Limited (BFL).

All of his business interests were in the UK where he continued

to live.

In April 2005 BFL was sold for £22m of which M’s share was

roughly £8.5m.

02

Prior to the completion of the sale of the shares in BFL, M

sought the advice of HB through one of its partners, Alan

Purnell (Purnell) as well as two other firms of tax advisers. It

was accepted that HB were generalist accountants.

Purnell had acted as M’s accountant since 1980. As a partner

in HB, Purnell continued to provide M with accountancy

services and general taxation advice up to the time of the

dispute.

M ultimately invested in a Capital Redemption Plan (CRP).

The CRP failed and M brought a claim against HB for failing

to direct him to an appropriate non-domicile tax specialist

before the sale. The litigation centres on M’s attempts to

avoid the payment of CGT on the disposal of the company

shares.

M alleged the following:

• he retained his Iranian domicile of origin for UK tax

purposes and could have entered into a complex

taxation scheme — known as a Bearer Warrant

Scheme (BWS) — and avoided CGT entirely on the

disposal of his shares in his company.

• HB should have advised him that he had, or might

have, non-dom status, which had significant tax

advantages, and

• HB should have advised him to seek tax advice

from a firm of tax advisers or accountants which

specialised in advising non-doms on their tax affairs.

If so, he would have implemented the BWS before

the scheme was blocked by primary legislation in

March 2005.

The only engagement letter was signed in July 1999. The

1999 retainer provided for general accounting services.

The retainer consisted of assisting M to fulfil his annual

obligations in respect of income tax and CGT, including

preparing annual tax returns and other routine compliance

matters. In addition, HB could provide more extensive tax

and financial planning on an ad hoc basis.

HB was never asked to give M tax planning advice to reduce

the already low rate of CGT applicable to disposal of his shares.

The High CourtM succeeded at first instance. The judge found that the

1999 retainer did not oblige HB to advise M on how to

minimise his tax liabilities unless specifically requested to

do so. However, it could be inferred from Purnell’s conduct

in giving unprompted tax advice that the retainer had been

varied to impose a duty to give tax planning advice.

There had been a meeting in October 2004 to discuss the

tax implications of the sale of the shares and how M might

reduce those liabilities. Purnell told M that more radical tax

schemes might be available, even though he could not say

that any would necessarily be suitable or what they were.

The judge held that even if the 1999 retainer had not been

varied prior to the critical meeting between M and Purnell

prior to the sale, during that meeting HB had undertaken to

provide M with advice as to how to minimise his tax.

The trial judge awarded M £763,658 for the CGT, £180,000

for the additional fees and interest payable on the CGT.

The Court of AppealThe Court of Appeal (CA) unanimously overturned this

decision.

The CA considered that the judge in the High Court lost sight

of the fact that there is no such thing as a general retainer.

The terms and limits of a retainer and any consequent duty

of care depend on what the professional is instructed to do.

“An accountant in the position of HB was not therefore

under a general roving duty to have regard to and to advise

on all aspects of the claimant’s affairs absent a request to

do so.”

The instances relied upon by the trial judge to conclude that

HB’s retainer had been expanded were insufficient. This

included evidence of when Purnell gave unprompted advice

to M. More importantly, they were insufficient to expand the

retainer to include specialist tax advice beyond routine tax

advice.

03

The court noted that an accountant who is retained by a client

to deal with his personal financial affairs will inevitably have

to point out what might be the hidden tax consequences of

any particular proposal. This may well arise in the context of

carrying out general accounting services such as preparing

tax returns or discussions about the client’s business plans.

Similarly, in handling the client’s tax affairs the client can

expect his accountant to advise on any available tax reliefs

under the relevant fiscal charge which may be available to

him to reduce his tax liabilities.

The CA nevertheless made it plain that “routine tax advice

of this kind, though an important part of an accountant’s

ordinary duties, is not what this case is about.”

The trial judge failed to differentiate between the generalist

tax advice which Purnell gave to M on the occasions

referred to by the judge and the much more sophisticated

form of tax planning exemplified by the BWS. The latter

involves a complex re-formulation of the transaction, in

order to bring about particular tax consequences, rather

than a mitigation of the tax liability which the transaction will

otherwise produce.

Commentary This case has significant implications for all professionals

in relation to the scope of their retainer. It also highlights

the inherent dangers in straying outside the terms of the

engagement letter.

The judgment is particularly helpful to accountancy firms,

as it clarifies that they do not have a general duty to

recommend specialist tax planning to their clients, unless

they specifically offer this service to clients.

To avoid any ambiguity on the scope of the retainer,

professionals are best advised to confirm their retainer in

writing and keep it up to date. In certain circumstances it

would also be useful to specify what is excluded from the

retainer. In this case it would have been helpful if HB had

specifically excluded the specialist advice which M was

seeking from the other two firms.

Mehjoo v Harben Barker (a firm) and another [2014]

EWCA Civ 358

04

Negligent solicitor succeeds in reducing damagesA firm of solicitors successfully reduced a £186,000

damages award for professional negligence by a former

conveyancing client in Darby & Darby v Joyce.

Darby & Darby solicitors (D) had acted negligently in the

conduct of a dispute concerning restrictive covenants.

Nevertheless, D clearly advised their client to cease building

works and warned that expensive litigation would ensue

otherwise. The cost of injunction proceedings brought by

the covenant-holder to enforce a cessation of the building

work was therefore not attributable to the firm’s negligence.

BackgroundMs Joyce (J) bought a £460,000 property, Tamarisk,

overlooking the Torquay Marina in 2007. J instructed Mr

John Darby of D to act for her on the purchase of Tamarisk.

J planned to carry out substantial building works to the

property. She also intended to subdivide the property and

let half of it, to finance the project.

D failed to inform J that the house was subject to restrictive

covenants. Under the covenants, the premises could only

be used as a single private dwelling, and the external

appearance of the property could not be altered without the

consent of the covenant-holder and neighbours, Mr & Mrs

Hoyle (H).

J commenced building works which were, unbeknownst to

her, in breach of the covenants. She received a letter from

H warning her to stop the works until written permission for

them was granted, otherwise an injunction would be sought.

J re-instructed D to assist her with the ensuing neighbour

dispute. D attempted to negotiate consent, but did not

initially advise J to stop the works or give any advice on the

covenants. D later told J to cease all work until agreement

had been reached, and J signed an undertaking to that

effect. However, J continued with some building work

and H obtained an injunction. J’s property was eventually

repossessed and sold by the mortgage company for

£70,000 less than she had paid for it. J instructed new

solicitors and alleged negligence against D.

The Lower CourtThe Recorder found that D did not advise J about the

covenants and so breached the duty of care expected of

him as a reasonably competent conveyancing solicitor. D

should not have accepted instructions in relation to the

covenant dispute due to the potential conflict of interest.

He concluded that D had failed to advise clearly on the

meaning and effect of the covenants, and failed to make

it clear to J that all the building work needed to stop. He

found that had J been properly advised of the effect of the

restrictive covenants at the outset, she would not have

bought the property.

D was ordered to pay damages of approximately £186,000.

The damages consisted of J’s mortgage repayments,

insurance premiums, mortgage arrears, costs liability to

the neighbours, money spent on the building works and

the £70,000 difference between the purchase price and

distressed sale.

The defendant appealed.

The Court of AppealThe appeal was allowed in part.

Lord Justice Rimer described D’s handling of the case in

2007 as a professional ‘disgrace’. The solicitor proceeded

to discharge his retainer with “an unusual lack of

professionalism”. He failed to take notes of any meetings

and gave no clear advice to J in the early weeks of the

dispute.

05

However, the Court of Appeal held that D’s negligence

had not caused J to continue with building works in 2008,

which resulted in the neighbour taking out an injunction. The

Recorder had erred in finding that the injunction proceedings

were caused by D’s negligence.

On being re-instructed, D should have identified a potential

conflict of interest and referred J to other solicitors. D did

not give any clear advice on the nature and effect of the

covenants for a significant period. D knew that the works

were continuing, but J was not advised to stop. D eventually

told J to obtain consent before resuming the works and

advised that the works had to stop. Despite D’s unequivocal

advice, J did not stop all building work. It had been relayed

to her that, if she did not stop the works, she would face

expensive litigation. She did not stop the works and, as a

direct consequence of her refusal to accept that advice,

she was sued. Therefore, J was the cause of the injunction

proceedings and, in particular, their costs.

The Recorder’s conclusion that, had J known of the

covenants, she would not have bought Tamarisk was

correct. The Recorder found, on the balance of probabilities,

that she would not. He had not applied a presumption and

his view was a proper one to arrive at on the evidence.

The judgment deals with the correct measure of damages.

The trial judge had made a very generous award of damages

to the claimant. The appeal court held that that was wrong

and had to be overturned.

The consequence of the court’s conclusion on the causation

issue was that J’s costs of the injunction proceedings in the

sum of £23,000, was not a recoverable head of loss. Further,

the consequential matters that led to the distressed sale of

Tamarisk in 2009 at a loss, were not caused by D either. The

loss on the resale was therefore not a recoverable head of

loss.

However, J was entitled to damages representing the

difference, if any, between (i) the price she paid for Tamarisk

and (ii) the value of Tamarisk, subject to the covenants,

when she purchased it. The Recorder had made no finding

as to what that difference was. The matter would therefore

be remitted for that assessment to be made. Rimer J noted

that in SAAMCo (1997), the House of Lords disapproved

the distinction between so-called ‘no transaction’ and

‘successful transaction’ cases.

To award J damages in the sum of the mortgage payments

made, or which ought to have been made, and insurance

payments for the property, was to compensate her for the

cost of purchasing the property. There was no rational basis

on which J could claim to be compensated for incurring

expense which, if not incurred in relation to her enjoyment

of the occupation of Tamarisk would, on the probabilities,

have been incurred in relation to another property. The same

went for the insurance premiums.

The Recorder’s award of the costs of the building works was

upheld. He found that J had bought Tamarisk, because of

D’s negligence and, but for that negligence, she would not

have purchased it. She incurred expense in building works

to the exterior and interior that she would not, but for D’s

negligence, have done at all. They did not enhance the sale

price and so could be regarded as wasted. To the extent

that J continued with the exterior works after the initial

objections from H, it could not be said that she thereby

failed to mitigate her loss because, for a significant period,

D did not advise her to stop the works. The incurring of

wasted costs in carrying out the works was the type of loss

for which D should be regarded as accepting responsibility,

as well as being a type of loss within the contemplation of

the parties at the time of the breach.

CommentaryOn appeal, the court therefore restricted the damages

award to two heads of loss:

(i) Any difference in value at the date of purchase between

the price paid for the property in ignorance of the restrictive

covenants, and the open market value with the restrictive

covenants, and

(ii) the client’s wasted costs on the building works to the

property.

06

These were consequential losses which should be subject

to an assessment of damages at a future hearing.

All other heads of damage allowed by the trial judge were

overturned. The defendant was therefore successful in

restricting the damages on appeal but the case illustrates

the inherent difficulty in assessing damages. Lord Justice

Longmore admitted that he “found it difficult to assess the

damages”. Lord Justice Tomlinson also confessed that his

“mind wavered” on the question whether D’s undoubted

negligence should be regarded as causative of J’s costs

liability in the injunction proceedings. It is worth noting that

LJ Longmore dissented on this point and concluded that

the expenses of the injunction proceedings were in fact

attributable to D’s negligence.

The decision also emphasises that conveyancing solicitors

should always ensure that any restrictive covenants are fully

explained to the client.

At the trial, D asserted that he would have explained the

existence of the covenants at their meeting in accordance

with his usual practice but J denied he had done so.

Unfortunately D had no attendance note of the meeting to

support his assertion. D was also criticised by the court for

failing to copy important correspondence from H’s solicitors

to J that would have clarified the seriousness of her position.

The case is a good example of why it is crucial for any

professional to accurately record advice provided over the

telephone or in meetings. A contemporaneous record of

advice given to J in relation to the restrictive covenants may

have stifled this costly professional negligence claim at the

outset.

Darby & Darby (A Firm) v Joyce [2014] EWCA Civ 677

07

Surveyor not under a duty to predict subsidenceA recent Court of Appeal decision provides welcome

clarification to surveyors on the extent of their duty of care

in providing mortgage valuations. In Anne Marie Hubbard

v Bank of Scotland Plc the court dismissed the claimant’s

appeal in respect of an allegedly negligent valuation report

carried out by a surveyor employed by the defendant bank.

BackgroundIn 2005 Mrs Hubbard (H) purchased Ashton House, a large

property on an old quarry site in Wolverhampton with the

assistance of a loan provided by the Bank of Scotland Plc

(B). The house was built in 1979. It was located on its plot

in such a way that it straddled the quarry wall underneath,

so that the side of the house facing the road was built on

rock but the garden side built on softer infill material. Prior

to purchase, a surveyor (S) employed by B undertook a

valuation of the property. H paid a fee of £715 for her survey

and the valuation report was addressed to her.

The valuation report noted a few cracks in the wall of the

rear bedroom. S classified the cracks to be in category 0 (i.e.

up to 0.1mm in width). The report noted that the property

had not suffered from recent movement and that no further

action was required. H said that she had asked S about the

cracks on his inspection and that he had said that they were

old and nothing to worry about.

The report was not a full survey and involved only a visual

inspection. It indicated that it was open to H to commission

a more detailed inspection and report.

Following completion, the property suffered from differential

subsidence adjacent to the original cracking and the

house had to be underpinned. Subsequently, H pursued a

claim against B to recover her losses on the basis that the

valuation report prepared by the surveyor failed to:

i. state that there was (or might be) ongoing subsidence;

ii. advise H to seek specialist advice; and

iii. warn H that the value of the property was reduced by the

cracking.

Lower Court decisionThe claim was dismissed at first instance. The judge

concluded that the surveyor had acted in accordance

with practice accepted as proper by a responsible body of

chartered surveyors skilled in their particular field and had

not been negligent.

The Court of AppealThe court held that B would not be liable unless S knew or

ought to have known as a reasonably competent surveyor

that he should have recommended a full structural survey.

Surveyors regularly saw evidence of past movement. S took

the view that the cracks he saw were small, old and not

ongoing.

It was also important to bear in mind the basis on which

the report was given. It was not a full structural survey.

Its limitations were amply and clearly spelled out in the

guidance notes and advice sections of the form. The duty

was therefore more limited than that of a structural surveyor.

His job was to produce a valuation on the basis of his visual

inspection.

S did not in fact think or suspect that the defect was one

which could have a material effect on the valuation of

the property, as his contemporaneous notes recorded.

Whether S ought to have had any such suspicion was the

subject of expert evidence and on which the judge preferred

the defendant’s expert. The judge found that at the time of

the survey in 2005, any significant structural issues in the

immediate vicinity was not common knowledge.

In dismissing the appeal, the court found that it was

unrealistic to suggest that a valuation surveyor, who sees

a small long-standing crack which displays no signs of

ongoing movement, is negligent in failing to recommend a

full structural survey. Lord Justice Floyd said that:

“To set the duty at that level would mean that the sale of

any property which displayed cracking of almost any kind

08

would be held up pending a full structural survey. Such a

conclusion would, I would have thought, not be welcome by

vendors, by lenders or by borrowers.”

CommentaryThe court drew an important distinction between the duty of

care owed by a valuation surveyor and a structural surveyor.

It was common ground that the defendant’s valuation report

was not and did not purport to be a full structural survey.

It contained guidance notes on the first two pages which

stated:

“You have chosen a valuation report which is a limited

inspection of the property highlighting only those items

which we consider will materially affect value. It is

prepared… in accordance with the RICS Mortgage Valuation

Specification…Valuers cannot see through solids or see

things that are hidden by wall and floor coverings. They will

not move furniture or obstructions… Valuers will look at the

outside of the property…You still have the option to request

a more detailed report and we would be pleased to help you

with this.”

The scope of the professional’s retainer was therefore also

pivotal in this case. Fortunately for B, the retainer was clearly

set out in this matter. It is a useful reminder to all surveyors

to clearly set out the extent of their retainer at the outset.

Anne Marie Hubbard v Bank of Scotland (t/a

Birmingham Midshires), Bank of Scotland Plc (t/a

Colleys) [2014] EWCA Civ 648

09

SAAMCo revisitedA full report of the recent summary judgment application

in Credit & Mercantile Plc v Nabarro (A Firm) 2014, is not

yet available, but we consider it worth a mention because

the principles set out in South Australia Asset Management

Corp v York Montague Ltd (SAAMCo) (1997) were once again

applied. The court held that, in accordance with SAAMCo,

a mortgage lender had no real prospect of showing at trial

that it could recover more from a negligent solicitor than the

difference between the actual value of a property and its

value with planning permission.

BackgroundCredit & Mercantile Plc (C) was a mortgage lender. A

prospective purchaser approached C for funding to

complete the purchase of a property. C instructed Nabarro

solicitors (N) to act for it on the potential advance.

The previous owner of the property had obtained planning

permission to demolish the existing dilapidated house and

construct a new one. However, the planning permission

related to the neighbouring land too and could not be

implemented on the property on its own. N negligently failed

to notice that fact and made its report on title accordingly. C

advanced £1.65 million to the purchaser who subsequently

defaulted on the loan. Despite efforts to sell the property

to repay the sums due under the mortgage, a significant

shortfall of £1.5 million remained. C subsequently claimed

this from N.

N disputed causation and quantum and applied for

summary judgment in regard to the measure of loss. N

sought a declaration that the loss recoverable by C was

limited to the difference between the value of the property

with implementable planning permission and the actual

value of the property at the time of the transaction in August

2007.

C submitted that N could be liable for the whole of the loss

because the ability to implement the planning permission

went to the viability of the whole transaction and not just

the property’s value.

Chancery Division decisionJudgment was granted accordingly and the SAAMCo cap

was applied.

The cases since SAAMCo have distinguished between a

professional’s duty to advise someone as to what course

of action to take and a duty to provide information for the

purpose of enabling someone to decide on a course of

action - a subtle difference between the giving of advice

and providing information. The former professional advisor

would be liable for all the foreseeable consequences of the

action taken in reliance on that advice if it was negligent. The

latter advisor would only be liable for the consequences of

the information being wrong, and not all the consequences

of the reliance.

If the particular breach of duty had resulted in the lender

taking a security which was of less value than it thought,

the measure of damages was capped at the difference in

value, applying SAAMCo. Whereas, in a case in which the

lender, if it had known what it should have known, would

have decided that the borrower was a borrower to whom

it did not wish to lend, the solicitor was liable for all the

lender’s loss Bristol & West Building Society v Fancy &

Jackson (1997) considered.

Applying those principles, C had no real prospect of showing

that it could recover more from N than the difference

between the actual value of the property and the value with

an implementable planning permission in accordance with

SAAMCo. The problem with the planning permission had

not been appreciated until after the borrower’s failure to

repay. However, although it was clear that N was entitled

to the benefit of the SAAMCo cap, it was not clear that the

relevant date for comparing the values was August 2007.

The information and opinions contained in this document are not intended to be a comprehensive study, nor to provide legal advice, and should not be relied on or treated as a substitute for specific advice concerning individual situations. This document speaks as of its date and does not reflect any changes in law or practice after that date. Plexus Law and Greenwoods Solicitors are trading names of Parabis Law LLP, a Limited Liability Partnership incorporated in England & Wales. Reg No: OC315763. Registered office: 8 Bedford Park, Croydon, Surrey CR0 2AP. Parabis Law LLP is authorised and regulated by the SRA.

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CommentaryThe SAAMCO principle was originally described by Lord

Hoffman as a matter of the extent of the negligent defendant’s

duty, but subsequently described as relating to the extent of

liability. In any event, the SAAMCO principle serves to limit

the defendant’s liability for losses which factually flow from

its negligence.

The SAAMCo principle protects, for example, a surveyor

giving an opinion on the current value of a property. The

surveyor is protected from the vagaries of the property

market and he is not expected to make predictions about the

future state of the market. The principle therefore insulates

the surveyor from losses above the difference between the

surveyor’s negligent valuation and the property’s actual

value at the date of valuation.

However, where the professional’s duty is to advise on

whether a transaction or a particular course of action should

be taken by the client, then the scope of that duty is wider

than above and the SAAMCo cap does not apply.